What can we learn from China’s recovery?

MarketFinance April 27, 2020Comments Off on What can we learn from China’s recovery?

We’re well into our second month of lockdown and we’ve all adapted in different ways. Necessity is the mother of invention, after all. A lot of these shifts seem temporary – more a means of survival – while others may be longer lasting.

While it’s difficult to tell what the post-lockdown landscape will be, we can take some pointers from countries hit sooner by the pandemic which are starting, slowly, to return to a ‘normal’ life.

We take a look at the post-lockdown landscape in China and what UK businesses can learn from its recovery so far.

What to consider before reading the stats

There are a couple of things to be mindful of when looking at reports about China – or anything else related to the pandemic for that matter. Firstly, not all data is trustworthy, so take the source into account when looking at the statistics and figures.

Secondly, countries around the world responded to COVID-19 at varying speeds and with different economic stimulus packages, which will mean different recovery in terms of time and impact. China was fast to implement a total lockdown while the UK was significantly slower to react, so factor this into your reading of any upturns.

What’s more, the scale of the pandemic means there are a wide range of projected outcomes. The uncertainty involved in predicting economic recovery is higher as we’re looking across a larger set of regions. Western countries are on a different case growth trajectory to Eastern countries which successfully limited the spread earlier anyway.

The crisis is unprecedented and tricky to forecast

When coronavirus picked up momentum in Europe, it was hard to know what environment we would be coming back to once government sanctions were lifted. We didn’t have anything to base our assumptions on as the scale of disruption from COVID-19 has little precedent. Even 9/11 and the SARS outbreak in the early 2000s didn’t affect the entire world in quite the same way.

In January, the IMF forecast a 6% growth rate on the Chinese economy for 2020. They have since revised this to just 1.2%. This figure echoes the World Bank, which estimated recently that Asia will see zero growth for the first time in 60 years.

We’ve seen China’s GDP shrink by 6.8% in the first three months of this year – its worst growth since records began. Elsewhere, forecasts suggest global GDP will shrink by 2-7% this year. Things are set to get worse across the world for a sustained amount of time with recovery spread across 6-12 months, and Western economies likely to be even harder hit than Asia.

What did lockdown look like for China?

Overall, China needed a shutdown of 7 weeks to contain the virus. Places like Hong Kong, which came out of lockdown sooner, saw a second spike after 10 days of relaxed social distancing conditions. The short-term impact of the COVID-19 outbreak should be expected to last at least 2 full months, with medium-term problems lasting around 6.

Given that China went into lockdown sooner than most Western countries, we can expect longer for containment in European. Keep in mind that European government announcements aren’t useful for longer term predictions, so don’t hold out on things going back to how they were pre-pandemic within a few short weeks. Even when shops and businesses in the leisure industry reopen, that doesn’t necessarily mean we’ll be ‘back to normal’.

China is showing initial signs of recovery, with industries such as foodservice, online retail and transport coming back more strongly than others. However, economic activity remains at around 60% of January 2020 levels.

At the beginning of the outbreak there was a 20-30% reduction in consumer spend across industries in China. Yet, on the first day of reopening, the second-largest Hermès store in Guangzhou saw a strong rebound of post-coronavirus luxury spending, taking €2.7million in one day. Regional spending is increasing across all sectors, even in luxury, which is predicted to be hardest hit.

Return to domesticity makes digitisation key

Chinese businesses are now resuming operations and in Beijing traffic levels are currently where they were pre-crisis. Understandably, areas such as real estate and outdoor leisure are taking longer to pick up. However, after a 15.8% fall in total retail sales of consumer goods year-on-year, China is now seeing a 4.7% increase compared to January and February (when they were hardest hit by the virus). We will get through this, it’s just hard to say how long it will take.

It’s unlikely that things will start to normalise for at least 3 months, even when social distancing brings populations back into public environments. In China, most people are still choosing to focus their leisure time at home rather than in crowded places. Businesses that have adapted to online demand will need to maintain and improve these adaptations as a shift to digital is expected to be sustained.

Our economy is more globalised than ever before

The Chinese economy is estimated to recover by late 2020 or early 2021, but it will be a slow road. Around 20% of their GDP comes from exports, with the UK, US, Germany and France being their biggest markets. Global demand is therefore key to its recovery and how long the shock lasts. Our own recovery will have an impact on theirs. It remains to be seen which spending shifts are permanent and which will be perpetual on a global scale.

Current travel restrictions are expected to last in the medium term, so it’s likely that spending will remain domestic and as local as feasible. Without a global market to sell to, all regions will suffer across diverse industries. With economies being so much more global nowadays, we can’t just look at one country as indication. China is a main growth engine, and they were hit first, but we all rely on each other.

Changes are hard to project

The US and Europe are likely to have a longer rebound period as public health interventions were introduced later in the infection cycle. Although China seems to have gone through the peak of the crisis and is on its way to recovery, circumstances are still too uncertain to predict. Public behaviour in China is still cautious, and with a fifth of their economy based on exports, it’s hard to see concrete evidence of ‘recovery’. Their recovery is as much dependent on ours as we are on theirs.

In his address this morning, Boris Johnson asked UK businesses to be patient and assured them that, when the time is right, “one by one, we will fire up the engines of the UK economy”. Even though time frames remain uncertain for now, businesses need to start thinking about successful recovery after society shifts back to a more public existence.

The ways we’ve adapted so far have shown exceptional innovation, strength and resilience across a wide range of industries. Now’s the time to become even stronger, more innovative and resilient as we look ahead to life after lockdown and our own economic recovery.